Impact Investing, one of the most popular investment trends of today, has moved from the very periphery of the financial world into mainstream investor attention in the span of just 13 years. The question emerges how impact investing managed to generate such a buzz among investors. This report delves into the rapid growth and increasing relevance of impact investing. Considering how it’s popularity has brought significant changes to the whole financial sector.
What is impact investing?
The term ‘impact investing’ was formally coined in 2007. Since then GIIN (the Global Impact Investing Network) has officially defined the practice as, “Investments made with the intention to generate positive, measurable social and environmental impact, alongside a financial return."
Andrew Parry, Head of Equities at Hermes Investment Management sees impact investing as a long-term endeavour with three key concepts involved.
- Intentionality - the active pursuit for good social impact vs the passive avoidance of negative social impact.
- Fulfilling a good cause - defined by one of the UN 17 Sustainable Development Goals.
- Measurement - how significant the impact was.
THE SIZE OF THE SECTOR
Impact investing is one of the fastest growing areas in asset management. The GIIN’s 2019 report estimates there are over 1,340 organisations managing $502bn in impact investing assets across the world. (Rising to $1 trillion by 2020 according to estitmates). If we directly compare this to global capital investments in Oil and Gas. Which according to the IEA, saw just over $500 billion in spending. It's very clear that impact investing has already become a dominant force in the investment world.
Impact investing has created a buzz around ‘responsible capitalism’ for the individual. As it unlocks the ability for investors to generate measurable impact on society with your investments. This is extremely powerful as the satisfaction from ‘doing good’ is amplified by the fact you achieved this ‘by yourself.’
Sapna Shah, the managing director at the GIIN has spoken more on this.
“Impact investing enables investors to achieve financial returns according to their risk and return preferences, invest in alignment with their values, and contribute to social and environmental solutions.”
Essentially impact investing is a way for investors to competitively differentiate themselves from others. This is the reason why investors from all over the world and big financial names like Blackrock and UBS are rushing to enter the market.
WHY IS THIS IMPORTANT?
Impact investing allows investors to generate financial returns and social impact at the same time. In turn, this has changed many industry opinions on impact investing, creating a fundamental shift. Impact investing is no longer just a philanthropic effort (a feel-good activity for ethically minded investors).
The growth of impact investing is showing the financial industry how powerful invested capital can be in addressing critical global social and environmental challenges. Many investors have realised that their money can fuel meaningful, sustainable and environmental impact.
RELATION TO CHANGES IN SOCIETY
The rise of impact investing has strongly coincided with a growing awareness of climate change. As the climate change narrative continues to emphasise the role of every individuals – many people have naturally looked for different ways to do their part.
Many investors have also started to think more holistically about the wealth legacy they want to leave behind. Wealthy investors want to proudly show future generations the social impact accomplished through their investments. Not that their wealth was grown from initiatives that permanently destroyed the planet. Moreover, sustainable companies have proven to build sustainable value in society. This makes them hugely attractive long term investments and Morning Star data has shown that impact investments are consistently outperforming their counterparts in recent years.
UK TAKING THE LEAD
The UK has always been a long standing pioneer of impact investing. Setting up a taskforce way back in 2000 to investigate how entrepreneurship could be applied to combine financial and social returns. Moreover, in 2013 the UK Government also set up the UK National Advisory Board (UK NAB) and the Social Impact Taskforce during its presidency of the G8. Both of these helped to take the idea global.
In 2015, the UK helped to expand the Social Impact Taskforce into the Global Impact Investment Steering Group of 13 member states plus the EU. Many of the associations the UK has established are strongly admired around the world and are in the process of being replicated by other nations. The UK will continue to forge the path in this sector, as sees the exponential growth in global interest hugely positive.
THE NEXT STEPS
The biggest challenge in the impact investing industry is continuing rapid growth. The areas that impact investing can best tackle are; air pollution, clean energy, sustainable agriculture, healthcare, education and transport. Creating radical change in any one of these areas, will require greater levels of commitment and collaboration from big partners and nations than ever seen before.
As an individual, you can get started today. Have a thorough look through the investments you currently hold and consider whether or not they align with your values. After this, you can then calculate your portfolio carbon footprint and assess each fund against a global benchmark to see if you have any weak spots or funds that need changing. This hugely informative article by the PRI on How to Measure A Portfolio Carbon Footprint may help you.
Otherwise, you can also start researching impact investments that align with your personal interests. Draw inspiration and advice from well-respected investors or financial advisors. 24 Billionaires that are Leading the Way is a great article to start with.
If your focus is primarily on creating the biggest impact. You could try out this tool called IRIS, which measures and manages the impact of any investment. This could potentially help you to decide which investments to prioritise.
The goal one day is for impact investing to become a standard norm of business and investment decisions. Although this may not happen in 2020, the financial industry is moving in the right direction. Fortunately, the strong interest in millennials bodes well for the future and the sector’s long-term popularity.
The concepts behind impact investing coincide with many of ARQ’s long term goals. ARQ has always strived to unlock more wealth for investors and their family. Motivated by the desire to make the world a better place. By providing better performance, directing some of this incremental wealth towards social good causes.